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What Is A Second Mortgage Loan?

What Is A Second Mortgage Loan?

A second mortgage loan is exactly as it sounds. It is simply a secondary lien placed on the existing property of which there is a current mortgage. Normally when a homeowner purchases of property there is an existing first mortgage which is considered the primary loan. Sometimes homeowners need additional financial resources and will take out a second mortgage which places a second lien on the property. There are many reasons why individuals take out second mortgages and it can be a smart move if used correctly.

If there is enough equity built up in a property or the financial situation of the homeowner includes significant earnings from long-term employment then they may be qualified to take out a second mortgage. The funds from a second mortgage are often used to consolidate credit card debt and can lead to thousands of dollars in savings. For example, if a second mortgage has an interest rate of 5% and yields $20,000 in cash proceeds which can be applied to $20,000 in credit card debt at 15% then that can lead to significant savings in interest not being paid to credit card companies. A second mortgage also has the benefit of the interest being tax-deductible where the interest on credit cards has no tax benefit whatsoever.

Sometimes the second mortgage is used to make money instead of paying off debt. Some individuals will use the proceeds from a second mortgage to purchase investments that have a higher rate of return than what they are paying on the second mortgage. They will also use the funds for home improvement which at the time of sale could lead to a higher price received for the property. If a homeowner plays their cards right and are able to make a $15,000 investment using a second mortgage by renovating or adding on to the home and then are able to sell it for an additional $30,000 they could technically clear $15,000 in profit.

Second mortgage loans are actually less common nowadays than they were in the past. This is primarily due to additional financial tools available to homeowners such as home equity lines of credit also known as HELOCs. Home equity lines of credit often have the same benefits of a second mortgage with the additional flexibility of being able to use funds as needed up to a certain ceiling similar to that of a credit card. This allows the homeowner to use the funds more judiciously for smaller expenses by writing a check or using a debit card instead of having to take out a large lump sum and then start paying interest and principal on a second mortgage. Since the interest from a home equity line of credit is also tax-deductible there may be times where it is not worth taking out a second mortgage.

A common use of a second mortgage loan is when purchasing a new home to pay closing costs and get a little bit of extra cash. For certain homeowners, who may not want to spend $3,000-$5,000 in closing costs, they can sometimes take out a secondary mortgage as part of the original loan agreement which can free up valuable financial resources. Not only does this give you additional cash for purchasing furniture or doing landscaping but the interest is tax-deductible which can also save money during tax time.

A second mortgage loan is a viable option for most existing home owners or new home buyers to help better manage limited financial resources or by providing tax benefits which would not normally be realized through other financial means. Why not use the equity built up in a home to pay off high interest rate credit card debt or other outstanding loans or to do home improvements to better your current living situation. If used correctly, a second mortgage loan can offer valuable flexibility and is yet another one of the many benefits of home ownership. Second mortgages and home equity lines of credit can help minimize the negative impact of life's unexpected complications and should be used to provide peace of mind.

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